Grim Treasury Borrowing Advisory Committee Report released 5/2/08

The Federal government’s budget balance is deteriorating in fiscal year 2008. Weaker economic activity has dampened the pace of revenue collection and lifted growth in economically sensitive spending. A recent survey of primary dealers estimates that the deficit for the 2008 fiscal year ending in September will exceed $400 billion with some economists expecting a deficit of more than $500 billion–a significant deterioration from fiscal 2007’s deficit of $163 billion. Economic stimulus measures will complement the forces widening the budget deficit. This year’s shortfall may surpass fiscal year 2004 as the largest on record in nominal dollars.

In its first charge to the Committee, the Treasury solicited our advice and recommendations for Treasury issuance over the near and intermediate term given the aforementioned deterioration in the fiscal budget outlook.

As a near-term solution, there was universal agreement on the Committee that the Treasury should introduce a 52-week bill to its auction schedule. A “year bill” would reduce the Treasury’s reliance on large cash management bills and provide sufficient financing to absorb the increased borrowing needs that have grown so quickly over the last year.

There was also universal agreement on the Committee that the Treasury needs to prepare for additional financing needs over a more intermediate term. In fact, several members argued that the current deterioration in the fiscal outlook might be more than temporary and that the risk of further deterioration outweighs the risk of a surprise improvement in the deficit.

Furthermore, additional members again reiterated their concern that this latest “cyclical” deterioration in the fiscal outlook is particularly troublesome as the longer-term “secular” forces of entitlement spending and the aging of the baby boom generation and their effect on the budget deficit are no longer that distant in the future.